Follow FINRA Rule 2165 and Be Sued

Follow FINRA Rule 2165 and Be Sued

Morrie Simkin December 2017
FINRA has adopted Rule 2165 that is intended to protect individuals from financial exploitation; however, brokers need to be aware that following the rule may invite a law suit. Fortunately, there are some ways that brokers can protect themselves.
FINRA Rule 2165, together with amendments to Rule 4152, effective February 5, 2018, allow a broker to withhold the proceeds of sales of securities and delivery out of the contents of an account of a “specified person” for 15 business days, expandable to 25, if the broker reasonably believes there has been or will be a financial exploitation. But the rule and amendments do not protect the broker from suits by the customer or the third parties who would have received the funds or account’s securities. Let me explain how this works, and how a broker can protect a customer whom he believes is the subject of financial exploitation.
A specified person, the object of these rules, is either a person 65 or older or a person over 18 who the broker reasonably believes has a mental or physical impairment. When such a person opens an account the broker is to ask for a “Trusted Personal Contact” whom the broker can contact if the broker suspects financial exploitation. “Financial Exploitation” is the wrongful taking or use of a specified person’s funds or any act or omission to obtain control over a specified person’s money, assets or property or to obtain control over them. If the broker reasonably believes there has been or will be a financial exploitation s/he may contact the Trusted Contact Person and may freeze the account for up to 15 business days, expandable to 25 business days if supported by the facts and circumstances.
While these rules permit this, they only apply to FINRA member firms and their registered personnel. They do not apply to the customer, the Trusted Contact Person or anyone who would have received the funds or assets in the account. Further, these rules could lead to a violation of the privacy rules (SEC Regulation S-P). The SEC has stated that it is permissible under Regulation S-P to report elder abuse to appropriate state authorities. But nothing was said about freezing the account or disclosing the freeze to the Trusted Contact Person, and possibly others.
So what is a broker to do if he or she suspects that a client may be subjected to financial exploitation under the rule? We recommend that the broker not freeze the account or disclose the situation to a third party. Rather, file a Form SAR-SF with FinCEN, under the Bank Secrecy Act Rules. This filing allows the confidential disclosure to FinCEN of possible violations of law. A broker filing a Form SAR is prohibited from disclosing that it has filed one, and the contents of what it has filed. This way the broker can notify the government, protect its client and not expose itself to litigation. If you have any questions about the interpretation of the rule or how you might want to change your own practices, please contact our office.